New Media

I wrote earlier about cord cutting and the new TV landscape. My original point of view is that these trends would move slower than expected, especially because the Pay TV ecosystem works very well for all companies involved. However, some news this last month is forcing me to re-think my point of view:

1. SVOD (short for subscription video on demand) subscribers are taking in more services, which for me means they truly value their on-demand video streaming services:

a. 19% of SVOD subs are willing to pay for 3 or more services (95% are starting out with Netflix and 82% with Amazon Video and adding Hulu, HBO Now, and iTunes.

2. TV usage fell in February by 4.2% for adults 18-49, and was down only 1.9% among all households

3. Nielsen’s Q4 Total Audience Report is out and is showing that live TV usage started to accelerate again after a period of a decelerating decline.

a. Live TV viewing: from Q1 to Q3 2016, the data showed a decelerating rate of decline from down 3 mins/day yoy in Q1, to down 2 mins/day in Q2, to down to 1 min/day in Q3. In Q4, that moved to a decline of 5 mins/day YOY
b. On the other hand, DVR viewing rose 1 min/day yoy to 33 min and 56% of HHs have an SVOD subscription vs. 54% in Q3.

a. Hulu TV is launching a package with 50+ channels for $39.99/month
b. YouTube is announcing the launch of 40 new channels with original programming
c. Twitter is announcing a live streaming channel on ROKU with news, sports, and entertainment.
d. Facebook is launching new shows
e. Sports is the greatest motivator for having a cable subscription and watching Live TV. This is of course noticed by SVOD service providers. Amazon is paying $50M to stream 10 Thursday night NFL games and is making this available ONLY to their Prime customers
f. Apple, who already offers subscriptions for HBO, Showtime and Starz is apparently trying to bundle these three services. Creating such a strong offer will make it easier to cut the cord.

While I always believed that the TV landscape will change, strong competition from SVOD providers is helping consumers migrate faster to streaming services and incumbents (Pay TV programmers and MSO’s) are forced to launch streaming options of their own (e.g. HBO NOW) and be open to skinny bundles. All this is accelerating the decline in Pay TV subscribers and LIVE TV viewing.

This is a continuation of two blogs I wrote earlier, (“The Almost Impossible Business of New Music” and “Streaming Music to the Rescue”). If you have not read those, my thesis is that streaming music companies were not getting their fair share of industry profits. They are saving the music industry but even though they have sizable audiences and significant revenue, they are still losing money.
This blog is just a very short update where I can share new publicly available information:

• First, 2016 marked the first year where revenue from streaming platforms surpassed revenue from sale of CD’s, downloads, and vinyl sales combined
o U.S. Recorded Music Sales : $7.68B, up 11.4%
o Streaming Revenues: $3.93B, up 68.5% (of which $2.26B were from 22.6M paying subscribers)

• Pandora’s 2016 Full-Year Financials:
o Revenue: $1.385 Billion (up 19% over 2015)
o Negative Net Income of $343M, double the loss than the previous year, and mostly due to higher SG&A expenses and investments in Research and Development of $142M which is $60M more than they invested in R&D in 2015

I believe these two recent data points strengthen my thesis: Streaming revenue is increasingly saving the industry, but despite revenue growth, Pandora lost more money because they keep investing in improving their product and user experience. What is really important is that services such as Spotify and Pandora are also lowering piracy because now the value proposition of consuming music legally is very strong. Therefore, the music industry really benefits from these players and if they want to continue promoting innovation and lowering piracy they will have to cut better deals with streaming companies.

If I mention NFL teams, such as the New England Patriots or Atlanta Falcons, they will surely not ring a bell. . But if I mention the Super Bowl, you might remember it as the sports event of the year with the best halftime show.

Nowadays, halftime is for the presentation of the most popular artist, as well as for commercials of the top brands that are ready to be aired for the first time. That advertising space can cost around US $5 million, according to Fortune magazine .

A great commercial aired in the Super Bowl may generate brand awareness in an audience of approximately 111.3 million in the world, and it may go down in history as one of the best commercials in the Super Bowl.

Equality in the Super Bowl

However, companies don’t just focus on branding. This year, the controversy and debate deriving from the immigration policies issued by the President of the USA, Donald Trump, sparked an opportunity for companies such as Audi and AirBnb to use their time on air to convey equality messages.

Budweiser:

The German beer company with highest sales in USA, recreated the story of its founder Adolphus Bush, a German immigrant who came to USA. The commercial reflected on the rejection he experienced from Americans upon his arrival to the country, nonetheless and despite adversities, he managed to create the best beer companies.

AirBnB

This online short-term lodging rental company has been criticized for not being inclusive enough, however, in this year’s commercial called “We Accept” it highlighted the diversity of families in USA, based on race, religion and sexuality.

Audi

This commercial, called Daughter, portrays the story of an eight-year old competing in a race with other children, while his father wonders if she is being scored in the same way as the other competitors. The German automobile company used the concept of family to commit with equal pay among its employees, regardless of their gender.

84 Lumber

Without a doubt, this was the most controversial commercial, it was even censored by FOX. But, why? Its content was considered “very controversial”, it showed the story of a Latin mother and daughter trying to cross the border, only to come face to face with Donald Trump’s promised wall. The commercial being in Spanish and the Latin characters were enough to stop it from being aired entirely.

Hollywood in the Super Bowl

But not all commercials focused on equality, some brands hired A-listers such as McCarthy, John Malkovich and Gal Gadot for a Hollywood-style ad, some even had a second part.

Wix.com

The famous cloud-based web development platform recreated an action movie starring Jason Statham and Gal Gadot, the commercial was so attractive, that they decided to have a second part

First part

Second part

Suqarespace

It features a not-so-serious John Malkovich trying to create his own domain name, but surprisingly, his name has already been taken as domain name. The commercial has more than 4.4 million YouTube views.

Kia

Following Donald Trump’s inauguration as President of the USA, the Women’s March took place. In Kia’s funny commercial, Melissa McCarthy plays an activist that is trying to save the planet.

Those were the best commercials of the 2017 Super Bowl, if you saw it, tell us which one is your favorite.

At Cisneros Interactive, under RedMas, we launched the first and only audio advertising network in Latin America and the United States Hispanic market, Audio.Ad. We did this because we are optimistic that users will increase their listening time on streaming services. Just like video/tv is seeing a monumental shift from Linear TV to video streaming (TV Everywhere, Netflix, YouTube, etc), we know that audio/radio is going the same way, and more listeners will stream podcasts, music, and news shows on their desktops and smartphones.

So why do I have such a negative title to this blog? Well, because the most popular companies offering these streaming services have monumental revenues and growth, but are still losing money. Why? Large parts of their revenue is going to music labels and publishers.

Pandora, which happens to be the #1 radio station in the USA in terms of audience (streaming or terrestrial), offers a “customized radio service” which in my opinion is truly fantastic. It is a publicly traded company, so here are their financials: 2015 Revenue of $1.2B, with an operating loss of $170M. In 2014 their revenues were $920M up from $600M in 2013. In 2016 their revenues, mostly from advertising, will probably increase another 20% but the company is still racking up losses. About 50% of its revenues go to pay music rights.

Spotify, is a global company with about 30 million paying subscribers and 70 million free, advertising supported users. Its “on-demand” service is also fantastic. Based on a Wall Street Journal article, “Spotify Seeks to Fine-Tune Music Rights as It Gears Up for IPO”, these are Spotify’s financials: 2015 Revenue of $2B, with a net loss of $200M. Music labels get about 58% of the revenue, and there is an additional 15% that goes to music publishers (songwriting rights).

Don’t get me wrong, there is nothing wrong with music companies getting paid, which obviously allow them to pay artists and songwriters, who are the creators of all this wonderful content. Also, both Spotify and Pandora are valued very highly (Pandora is valued at $3.2B) so investors think these companies will either renegotiate more favorable terms with the music industry or increase so much in scale that they will one day become profitable. I think the second reason is the most expected.

The point of my title is that after several years in business, and with more than a billion dollars in revenues, these companies are still losing money. Margins, when positive, will probably not be big. For two companies who are revolutionizing the music industry and benefitting millions of users with a great service and the music industry as a whole with a new and large revenue stream, the value they will extract does not seem commensurate to their innovative efforts and risk they took.

I was reading an article in Chicago’s Booth magazine and it made me realize how the entertainment business has changed in the last few years. In the non-digital world you created content more based on “creative instinct” than on data. Today, where a lot of content is viewed digitally and therefore a plethora of data is available, all of a sudden executives have to develop data analysis skills and/or rely on “quants” who can sift through data.

It is no surprise that this article was in University of Chicago’s Business School magazine. Booth always had a strong reputation for quantitative analysis either in Finance or in Marketing.

The article gives you some examples of how data is being used today to deliver content to the right audiences and I want to share some examples:

Netflix. Never before has so much data being available on viewing patterns. Who watches what? Where are they bailing out? What are the most popular genres? I remember that when Netflix started producing their own content, this was one of the arguments they used. They had data telling them what people wanted to watch, and also very importantly, they knew what type of show to market to each consumer.

Makers Studio being acquired by Disney and one reason was the trove of data it could collect. With 55,000 YouTube channels, Disney could access the viewing habits of 380 million YouTube subscribers. What makes a video go viral? How long do videos have to be to maximize virality and monetization? What time of day and which day is best to release a video? And how does this change by genre?

Social media. Most channels have millions of fans and followers in Facebook, Twitter, Instagram and now even Snapchat, and programmers who monitor their own and third party social media channels can learn a lot about their shows and what users would like to watch.

Channel’s own websites, apps and video players. In the digital world, channels now can have direct access to their viewers and gather almost an infinite set of data points. Before, cable operator gathered most of the data and the programmer was limited to its Nielsen ratings which still depends on a sample and also collects fewer data points.

So clearly data and data analysis has in the past 10 years become much more important in understanding what viewers want to watch. Obviously and fortunately no amount of artificial.

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